Renting vs. Buying

What you should know about renting vs. buying

The most important facts to consider in renting vs. buying a home are how long you plan to live in the house, and the costs of buying compared to the prices of rent.  Another important factor is what direction rent and home prices are moving and how fast.
Be aware of home prices and rental rates in your area.  In some places renting a home is considerably less than purchasing, while in other places the reverse is true.  Home prices in general are still shaky, and foreclosure rates are still in the process of stabilizing, which means you should proceed with extreme caution when considering whether to rent or buy a home.

Costs of buying a house

  • Purchase costs are the costs you incur when you buy your house. These include the down payment and typical closing costs (lending and title fees, etc).
  • Annual costs are the recurring monthly or yearly expenses. These include your mortgage payments, condo or HOA fees, renovation or remodeling costs, maintenance costs, property taxes and homeowner’s insurance. Property taxes, the interest part of the mortgage payment, and in some cases, a portion of the common charges, are all tax deductible.
  • Lost opportunity costs are based on the initial purchase costs and also the yearly costs. If you could have done something else with that money, like invest it in the stock market, that’s an opportunity cost.
  • Selling costs are the costs you incur when you sell your home. This includes the real estate broker’s commission and other fees (average 6% of the sales price), as well as the remaining principal balance that you pay to your mortgage bank.

Costs of renting a house

  • Initial costs are the rent security deposit and, if applicable, the broker’s fee.
  • Yearly costs are the monthly rent and the cost of renter’s insurance.
  • Lost opportunity costs are calculated each year for both your initial costs and your yearly costs.
  • Leaving your rental is equal to the rent security deposit, typically returned to a renter at the end of a lease
Since it can get pretty complicated, even for the mathematically inclined to calculate the breakeven period on renting vs. buying we’ve crunched the numbers for you to give you a rough idea of whether you should rent or buy a home.  For our calculations we assumed you would be buying the average house, with average property taxes, mortgage interest rates and transaction costs, vs. a comparably average home to rent.  Here’s what we found:
  • If home prices increase at 1% per year and rent prices increase at 2% per year, it’s better to buy if you’ll be in your home for at least 7 years.
  • If home and rental prices both increase at 2% per year, then it’s better to buy after 5 years.
  • If home prices increase 5% per year and rental rates increase at 2% then it’s better to buy at the 3 year mark.
  • Finally, if home prices decrease at 1% per year, and rental rates increase at 2% per year, it’s better to buy only after 15 years.
If you’re looking for a good rule of thumb, rent if you plan to stick around for at least 5 years, and buy if you plan to be in the home longer than 5 years.  If you stick with that plan, you should come out in pretty good shape.

 

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